Downtown apartment rents rise again in first quarter

Downtown apartment landlords again hiked rents in the first quarter, suggesting that the market is holding up well even as developers build new high-rises.

Downtown apartment landlords again hiked rents in the first quarter, suggesting that the market is holding up well even as developers build new high-rises.

The average Class A effective downtown rent rose to a record high of $2.25 a square foot in the quarter, up 2% from the previous quarter and nearly 9% from the year-ago period, according to a report by Appraisal Research Counselors, a Chicago-based real estate consulting firm. Effective rents include the impact of concessions like free rent, which have virtually disappeared as the apartment market has rebounded from a slump earlier in the decade.

Occupancies, meanwhile, continued to fall, reflecting competition from four new buildings added to the market in the past year. The Class A occupancy declined to 93.4% in the first quarter, down from 94.3% in the previous quarter and a peak of 97.5% in second-quarter 2006.

"It's a good sign that owners were able to get an increase (in rent) in spite of the fact that there's new inventory being leased," says Appraisal Research Vice-president Ron DeVries, who expects rents to rise 5% to 7% this year.

The four new projects are the Streeter, a 481-unit tower in Streeterville; Sky55, a 326-unit building in the South Loop; the Left Bank at K Station, a 450-unit West Loop development, and the 421-unit Kingsbury Plaza in River North.

Solid job growth has spurred demand for apartments, and the shaky condo market hasn't hurt either, as would-be buyers sit on the sidelines.

"If they're not certain that they're going to see some appreciation in a condo unit, they're less likely to act and may stay a renter," Mr. DeVries says. "There's not pressure on them to act right now, so they're not."

The question is whether the market will be able to absorb the numerous apartment buildings under construction or in planning. Developers have added 1,678 units to the market in the past year and another 2,150 are under construction, according to Appraisal Research.

A whopping 4,283 more are in the planning stage, but Appraisal Research estimates that only 1,887 of those apartments will get built. With rising construction costs crimping projected returns, many developers will decide not to go forward with new buildings, Mr. DeVries says.

That doesn't include Chicago-based D2 Realty Services Inc., which expects to break ground later this year on a 600-apartment building on Clark Street in the South Loop. Two projects are already under construction nearby and a couple others are in the works, but D2 Principal David Kleiman expects that demand for apartments will jump when the Roosevelt Collection, a major retail development under construction next door, opens in 2009.

"I'm not worried about the supply," he says. "The neighborhood where we are is going to be so sought after because of all the retail. Everybody's going to want to be where the action is."